Israel plans to build hundreds of new apartments in Har Homa, a neighborhood in the section of Jerusalem claimed by the Palestinians. The U.S. has said such construction is unhelpful to peace efforts, and the Palestinians say the project is undermining peace talks.
Olmert called Har Homa an "inseparable" part of Jerusalem. He said Israel would continue building in those areas of Jerusalem, including Har Homa, that it expects to keep under a final peace agreement.
"Everyone knows that there is no chance that the State of Israel will give up a neighborhood like ... Har Homa. It is an inseparable part of Jerusalem," Olmert said in a joint news conference with visiting German Chancellor Angela Merkel.
The fate of Jerusalem is the most contentious issue in Israeli-Palestinian peace talks, which were relaunched last November after seven years of fighting. Israel captured east Jerusalem in the 1967 Mideast war and annexed it to its capital.
The Palestinians claim east Jerusalem as the capital of a future independent state that would also include the West Bank and Gaza Strip, other areas captured by Israel in the 1967 war.
Under the U.S.-backed "road map" peace plan, Israel must stop construction in Jewish settlements, while the Palestinians must disarm militants.
Some 250,000 Israelis live in the West Bank, along with 180,000 Israelis in Jewish neighborhoods of east Jerusalem. The U.S. says the Jewish neighborhoods in east Jerusalem must also be considered settlements. Israel withdrew from Gaza in 2005.
Palestinian negotiator Saeb Erekat reiterated that Israel must halt all settlement construction, including in Jerusalem. "If they really want the year 2008 to be a year of peace, then this cannot be achieved with the continuation of settlement activities," Erekat said.
He called for U.S. intervention. Washington has agreed to monitor Israeli and Palestinian compliance with the "road map" peace plan.
In other developments:
Olmert has promised not to build any new settlements, but said Israel expects to maintain control of the Jewish neighborhoods of east Jerusalem and major settlement blocs in the West Bank as part of a final peace deal. Construction in these areas has continued.
"We have announced that there will be places where there will be additional building. These are places that will remain with Israel in any constellation, and this includes first and foremost Jerusalem, and everyone knows it," he said Monday.
Merkel said she had raised the issue of settlement construction with Olmert and noted that halting settlement activity is part of the road map. "We agree that all sides should try as much as possible to keep their obligations, and I've pointed out that both sides have things left to do," she said.
Olmert also announced that peace talks would resume later Monday. The Palestinians had suspended the negotiations early this month to protest a bloody Israeli offensive in the Gaza Strip.
Israel hopes to reach a peace deal with the moderate government of Palestinian President Mahmoud Abbas in the West Bank by the end of the year. At the same time, Israel has been battling Abbas' rival Hamas, which controls the Gaza Strip. The Islamic militant Hamas seized control of Gaza last June from Abbas' forces.
A new poll released Monday showed that Hamas' popularity has increased over the past three months at the expense of Abbas and his Fatah Party.
Recent months have been especially volatile in Gaza. Hamas blew up Gaza's border with Egypt to ease an Israeli blockade on the area, and Israel killed more than 120 Palestinians in its recent Gaza offensive. Palestinian attackers have bombarded southern Israel with rockets and 14 Israelis have died in Palestinian attacks. In addition, Abbas' efforts to make peace with Israel have made no visible progress.
These political developments have "managed to present Hamas as successful in breaking the siege (on Gaza) and as a victim of Israeli attacks," said the Palestinian Center for Policy and Survey Research, the independent think tank that conducted the survey. The events also presented Abbas and Fatah "as impotent, unable to change the bitter reality in the West Bank or ending Israeli occupation through diplomacy."
If parliamentary elections were held now, Hamas would receive 35 percent of the vote, compared to 42 percent for Fatah, the survey said. In December, Hamas would have received 31 percent, compared to 49 percent for Fatah.
In presidential elections, Abbas would be in a tie with Hamas candidate Ismail Haniyeh, the prime minister of Gaza, the poll showed. Abbas would capture 46 percent of the votes if elections were held today, down from 56 percent in December, while Haniyeh would take 47 percent, up from 37 percent.
The survey questioned 1,270 people and had a margin of error of 3 percentage points.